Dynasty Trust

Are you looking for a trust that can last forever while still avoiding estate taxes and protecting your assets?

A Dynasty Trust may be just what you’re looking for.

Most importantly, a Dynasty Trust enables you to protect your hard-earned wealth for future generations and to pass along your family values. Although this is one of the more complicated trusts to create, it does allow you to maintain family control from beyond the grave for generations to come.

If this powerful estate planning tool sounds like something you need to preserve your wealth and legacy for decades to come, keep reading as we discuss Dynasty Trusts in more detail.

What is a Dynasty Trust?

A dynasty trust is a long-term trust created to pass wealth from generation to generation without incurring transfer taxes, such as the gift tax, estate tax, or generation-skipping transfer tax (GSTT), for as long as assets remain in the trust.

These types of trusts differ from other trusts in the length of time they last and the control they offer. Depending on the state where the generation-skipping trust is established, they can last for hundreds of years.

How a Dynasty Trust works

Dynasty trusts allow wealthy individuals to leave money to future generations, without incurring estate taxes. Since a dynasty trust is an irrevocable trust, it cannot be altered or changed and has no specified termination date.

Grantors control how relaxed or how strict they want the rules for their Dynasty Trust. However, once the trust is funded, their power comes to a halt. They are not longer permitted to change the rules or terms of the trust. The same rules also apply to the future beneficiaries.

A Dynasty Trust provides for a beneficiary during their lifetime and upon the primary beneficiary’s death, the trust will be divided into sub-trusts – one for each of the beneficiary’s children. Upon the death of a beneficiary’s child, the trust will continue to divide into sub-trusts for the next generation, continuing down the bloodline until the funds diminish.

Advantages of Dynasty Trusts

Dynasty Trusts have several unique benefits that make them an attractive option to wealthy individuals who want to leave their assets to multiple generations. Benefits are broken down into two categories: tax benefits and family benefits.

Tax Benefits

Avoiding federal estate tax is one of the main advantages of a Dynasty Trust. There are certain rules and regulations that apply to this tax exemption, and it’s always best to consult with an experienced estate planning attorney.

Generation Skipping Transfer Tax Exemption - The GST tax’s purpose is so the transferor cannot avoid transfer taxes by “skipping” a generation.

Avoid Double Estate Taxation - In a Dynasty Trust, assets are excluded from the estate tax calculations for your and future beneficiaries’ estates. The trust assets remain in the trust and not in your beneficiaries’ estates.

Family Benefits

Protection of Family Values - Dynasty trusts allow the grantor to direct how funds and assets will be released to future generations. This allows the creator to determine how much, and in what situations, that funds will be released.

Asset Management and Protection – Dynasty trusts provide a long-term way for managing assets for the benefit of your heirs. Because the trust is irrevocable it can be designed to protect beneficiaries from creditors.

Avoid Probate – Like most trusts, a Dynasty Trust can also eliminate the need for probate court.

Funding a Dynasty Trust

There are three ways to fund a Dynasty Trust:

  • Gifts
  • Loans
  • Sales

You can fund Dynasty Trusts with gifts, but any gift to an irrevocable trust is susceptible to gift tax. One advantage of a Dynasty Trust is that you can transfer the amount of your remaining lifetime exemption from gift taxes to avoid the tax.

The gift can also be exempt from another type of tax, called the generation-skipping transfer tax. This is only valid if a donor’s exemption from GST tax is equal to or more than their gift tax exemption.

You, the grantor, may make loans to the Dynasty Trust to fund life insurance premiums or allow the trust to make investments. The IRS does require interest to be paid on these loans.

You can also fund a Dynasty Trust by selling assets to the trust in exchange for a promissory note. Appreciation on the assets sold to the trust more than the interest rate payable on the note helps dodge gift taxes.

Is a Dynasty Trust Right for Your Family?

Dynasty Trusts are not for everyone. Although there isn’t a minimum dollar amount required to contribute to a Dynasty Trust, this type of trust is best for individuals with large, taxable estates.

It’s ideal for ultra-high net worth individuals with significant assets who want to manage their wealth across the generations. An example of someone who would benefit for a Dynasty Trust is someone who sold a profitable family-owned business or has a very large estate that they want to pass down for generations.

A Dynasty Trust does not make sense for anyone who doesn't need the trust to last for several decades. There are several less complicated types of trusts to choose from depending on your unique situation.

Planning a Dynasty Trust for future generations is complex. You can design the trust to be flexible and allow certain levels of control to certain beneficiaries. Then, it’s vital to take into consideration state and federal taxes, as well as detailed estate planning. Plus, not every state allows Dynasty Trusts.

To ensure you’re making the best decisions, consult with an attorney who can help walk you through the process and determine the best course of action.